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Toronto office tower boom the biggest since the go-go ‘80s

Toronto is in the midst of an office building boom unlike anything seen since the 1980s.

Some 16 new office towers are currently under development and will add four million square feet of new space over the next three to four years.

That could top five million square feet if Queen’s Park moves ahead with plans to reduce its real estate footprint by downsizing each civil servants’ work area from 250 square feet to 200, says a new report from TD Economics.

That shrinkage of elbow room alone would add the equivalent of a 43-storey office tower to the downtown core.

Vacancies are expected to remain tight and rents ease upward until new buildings start opening in 2013 and 2014, largely because of the condo boom: More businesses and retailers are looking to set up shop within easy reach of that pool of young workers and consumers, says the report by senior economist Sonya Gulati.

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“Normally 3 ½ years after a recession, the vacancy rate would be at its peak, but because of this explosive demand for downtown space, the vacancy rate is actually at one of its tightest points in history,” Stuart Barron, national director of research for commercial brokerage Cushman & Wakefield.

Commercial space downtown is also at a premium because so many of the city’s aging Class A office towers in the financial district are undergoing major renovations and upgrades, the TD report notes.

That means even Class B and Class C space is being snapped up quickly.

From 1982 to 1993, new downtown office construction averaged about 2.2 million square feet per year, says Barron. Coming out of the 1992 recession until 2008, it averaged just 170,000 square feet per year.

But there has been a boom since 2009 with the addition of some 4.5 million square feet completed and more recently, another 3.7 million expected to come to market between 2014 and 2016.

“Two back to back development cycles is very unusual, given the amount of global economic uncertainty we’re experiencing,” says Barron.

High demand for office space is playing out right across the country. In six of seven major markets studied — Toronto, Vancouver, Calgary, Edmonton, Ottawa and Montreal — vacancy rates have dipped below the national average of 8 per cent, according to the report.

In downtown Toronto, the vacancy rate stands at just 4.5 per cent compared to an average of 9.2 per cent over the last two decades, says Barron, despite the fact 4.5 million square feet of new office space has come on the market since 2009, much of it in glass-and-steel towers on the Railway Lands.

“An interesting comparison can be made between the commercial sector and the residential sector,” says Gulati.

TD Economics has been predicting a 15 per cent correction in house prices.

“Just when one side of the market is expected to undergo a correction, the other is gaining strength.”

Demand also remains strong in the suburbs, evidence the commercial market “has once again found its footing after being hard hit by the 2008-09 recession,” the report notes.

The industrial sector is holding steady but remains the most vulnerable to fallout from the eurozone crisis and any significant downturn in China, says Gulati.

The Canadian retail sector “is taking a bit of a breather” from the arrival of U.S. stores after a revival of foreign retail demand last year by retailers J. Crew and Marshalls, the report notes.

Target plans to open 200 stores across Canada, 125 next year, all but two of them in converted Zellers’ space.

But retail sales growth may be hampered, says the report, given that sales are now coming in at just 4 per cent, well below the 6 to 7 per cent seen before the recession: Canadians are pulling back on spending and focusing on paying down household debt in anticipation of a rise in interest rates.

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